To hear many pundits tell it, opening up more of America’s lands to oil exploration and
development, especially offshore, won’t lower oil prices. So why bother? After all, we operate
in a global oil market, and even if the U.S. somehow increased its domestic crude oil production
appreciably, wouldn’t Chinese demand, OPEC duplicity, and greedy speculators conspire to
keep oil prices high?
The law of supply and demand dictates that, all else being equal, additional U.S. production
must necessarily put downward pressure on world oil prices, just as additional production
from OPEC or Canada would. If the fear is that OPEC would respond to greater U.S. output by
trimming production by a corresponding amount, the worst that could happen is that world
crude oil prices would remain unchanged while more investment and jobs are created in the
U.S., our balance of trade improves, and more revenue flows to state and federal governments.
All in all, these are not bad outcomes.
The reality, however, is that we have policies in place preventing the United States from
responding to increased demand for oil, or even to put a serious dent in imports. It’s been that
way for many years, and the data show it.
Correlations were calculated to measure the relationship between crude oil production and
global oil demand for the period 1970 through 2010. Because global oil markets are in balance,
it shouldn’t come as any surprise that over the past 41 years the correlation between global
crude oil production and global oil demand comes in at 0.99, nearly perfectly positive.
Different countries, however, respond very differently to global market signals, especially in
countries where national oil companies hold sway. Saudi Arabia, for example, regulates oil
output to defend a certain target price. Price taking countries, on the other hand, usually pump
as much as they can as long as it is profitable to do so. Countries relying on freely operating
private oil companies might see a range of responses depending on market circumstances, the
regulatory environment, and available resources.
To see how different countries adjusted production in response to global demand, correlations
of crude oil output and global oil demand were calculated for the largest 29 oil producing
countries in the world in 2010 (i.e., those producing more that 500,000 barrels per day). The
results are presented in Table 1.
Table 1. Correlation of Crude Oil Production and Global Oil Demand by Major Producing Country: 1970-12010
Country
Correlation
Kazakhstan
0.97
China
0.94
Brazil
0.94
Canada
0.92
Algeria
0.91
Angola
0.91
United Arab Emirates
0.89
Russia
0.85
Sudan
0.83
Qatar
0.83
Azerbaijan
0.82
Norway
0.82
Colombia
0.81
Argentina
0.80
Oman
0.80
Malaysia
0.78
India
0.77
Mexico
0.75
Nigeria
0.74
Saudi Arabia
0.57
United Kingdom
0.43
Egypt
0.37
Iraq
0.17
Kuwait
0.08
Iran
(0.01)
Venezuela
(0.06)
Indonesia
(0.26)
Libya
(0.30)
United States
(0.96)
United StatesNotes: Correlations for former Soviet republics calculated from 1992-2010. Opec members in italics.
Sources: Energy Information Administration.
As one would expect, crude oil output in most countries tends to correlate quite strongly
and positively with global demand—that is, as global oil demand rises, so does domestic oil
production. Of the 29 countries considered, 15 show strong positive correlations of 0.80 or
above. This group also includes countries that have managed to increase output in response to
increased global demand with much lower reserves than the United States.
Saudi Arabia’s role as a price-making swing producer is evident in its correlation of 0.57. There
also were a handful of countries—i.e., Iran, Iraq, Kuwait, and Libya—with very weak positive
or negative correlations. For the most part, these countries have gone through sometimes
prolonged periods of political instability or war that have disrupted oil production.
The result for the United States, however, is unique. Despite decades of concern over oil
imports, the correlation of U.S. oil output to global oil demand over the last 41 years is -0.96, an
almost perfectly negative correlation. Figure 1 shows how U.S. crude oil production and global
oil demand are almost a perfect mirror image of each other. No other country in the world—
not even those suffering through revolutions and wars—has managed to sustain a pattern such
as this for over four decades.
Much is made of the fact that when it comes to crude oil production, the U.S. punches above
its weight. At about 5.5 million barrels per day, U.S. output ranks third highest in the world with
about 7.4% of global output. One often hears that the U.S. is running out of oil and that our
current reserves make up just 2% of the world total, but this is a grossly inadequate view of U.S.
oil resources. The story is much more complex.
Consider that while proved reserves in most other producing countries are being replenished—
global proved reserves since 1970 have risen 135%—they aren’t in the United States. In fact,
the U.S. reserves estimate reported by the Energy Information Administration for 2009 was
lower than the estimates reported by EIA for every other year going back to 1970 except one—
2008—a situation matched only by Indonesia among the large producing countries.
3
But the United States isn’t running out of oil, it’s running out of access. There are many
promising sources of crude oil in the U.S., but the vast majority of them are off limits to
exploration and production. The exact size of this resource is unknown because companies are
not allowed to do the necessary work to find out where the oil is and how much of it there is.
Preliminary work by government agencies, however, suggests that the resources could be quite
large.
The Department of the Interior estimates that the U.S. Outer Continental Shelf (OCS) contains
86 billion barrels of undiscovered, technically recoverable oil resources. However, about 97% of
the OCS is not under lease, preventing any exploration or production of oil and gas.
Onshore federal lands contain an estimated 24.2 billion barrels of undiscovered technically
recoverable oil resources. But like our offshore resources, the vast majority of these onshore oil
resources are unavailable for exploration and production.
The United States has massive unconventional crude oil reserves. Government estimates point
to U.S. oil shale and oil sands resources exceeding 2 trillion barrels, larger than total proven
global reserves of conventional oil. The global supply picture, and U.S. competitiveness for that
matter, could improve if even a small fraction of these resources can be tapped economically.
We have seen how horizontal drilling and hydraulic fracturing in shale formations have
combined to open up new possibilities for natural gas production around the world,
fundamentally changing natural gas markets. Similarly, new exploration, drilling, and
production technologies will be critically important in finding and developing crude oil from
unconventional oil sands and shales and in deep water. Advanced multidimensional seismic
imaging, for example, allows a much higher degree of accuracy in locating oil and gas deposits,
which reduces the amount of drilling while increasing the amount of resources recovered.
We’re already seeing signs of this. Recent improvements in technologies for producing oil from
shale—including hydraulic fracturing—have caused the decades-long trend in declining U.S.
production to level off and even reverse slightly in recent years. If these shale resources and
other resources, such as those in the Gulf of Mexico and the Outer Continental Shelf, were
proved and production from them allowed, it could increase domestic supplies considerably.
The United States is blessed with vast oil resources, dynamic capital markets, and a culture of
innovation that sustains our global leadership. These assets, however, are not being developed
or used to their full potential. What are we waiting for?
Mr. Eule is Vice President for Climate & Technology at the U.S. Chamber of Commerce’s Institute for 21st
Century Energy.
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